Zillow Real Estate Research in the US has just released a report in to mortgages across America by country which are in negative equity, or effective negative equity which is, just like the real-estate triggered GFC creating ripple affects across the US and the world. Graphics below and further commentary follows.

From Zillow: the national negative equity rate continued to decline to 18.8 percent, down 12.6 percentage points from its 31.4 percent peak in the first quarter of 2012. Negative equity has fallen for eight consecutive quarters as home values have risen. The national negative equity rate fell from 25.4 percent in the first quarter of 2013 and 19.4 percent in the fourth quarter, while the pace of annual home value growth slowed to 5.7 percent in the first quarter of 2014, from 6.6 percent at the end of the fourth quarter of 2013. However, more than 9.7 million homeowners with a mortgage still remain underwater (Figure 1).

More from Zillow: “Moreover, the effective negative equity rate nationally — where the loan-to-value ratio is more than 80 percent, making it difficult for a homeowner to afford the down payment on another home — is 36.9 percent of homeowners with a mortgage. While not all of these homeowners are underwater, they have relatively little equity in their homes, and therefore selling and buying a new home while covering all of the associated costs (real estate agent fees, closing costs and a new down payment) would be difficult (Figure 2). Of all homeowners – roughly one-third of homeowners do not have a mortgage and own their homes free and clear – 13.2 percent are underwater.”

Mathew Murphy, writing for Business Spectator on this issue ” The negative equity issue is one that, unsurprisingly, is being played out at the lower end of the market.

Nearly a quarter of the homes in the $US86,101 to $US389,100 range are underwater compared to just 10 per cent above $US389,100, according to the Zillow report.

Given the precarious predicament you may be tempted to cut your losses, sell-up and rebuild. However, since Congress allowed the Mortgage Forgiveness Debt Relief Act to expire, short sellers are liable for taxes on forgiven debt. The simple supply and demand issue is also causing sellers to have way more confidence in the market than they should.

Real estate brokerage firm Redfin said 40 per cent of sellers are planning to price their homes above market value when they list this year. That is already up from 33 per cent at the beginning of the year.

While the Zillow report may not have attracted as many headlines this week, it is a red flag that should not be ignored.”